Flow-down (or “pass-through” or “conduit”) clauses are a common feature in construction contracts, particularly in projects involving multiple tiers of contracts. These clauses are intended to ensure the terms and conditions between the prime contractor and owner apply to all lower tiers of contractors (subcontractors) too. At their best, these clauses promote uniformity and predictability throughout the hierarchy of a project. But if not carefully considered, these clauses can have unintended negative consequences.
The Good and Not-So-Good of Flow-Down Clauses
For subcontractors, the implications of flow-down clauses are significant. On the positive side, they ensure consistency of terms among all project participants, which can help to align parties with the overarching project requirements. This alignment can streamline compliance with project specifications, quality standards, and safety protocols, fostering a more cohesive working environment.
However, the impact of flow-down clauses is not solely beneficial for subcontractors. By their nature, these clauses are typically negotiated in the first instance between a project’s owner and its prime contractor, which can put lower-tiered contractors at a disadvantage in multiple ways. Most obviously, by not being part of the original negotiation, it can mean that lower-tier contractors are simply not as focused on the full implications of flow-down clauses as the parties to the negotiation. Also, lower-tier contractors are generally differently situated than prime contractors in a number of critical ways (e.g., bargaining power, capitalization) and the effects of flow-down clauses may be felt very differently as between a prime contractor and a lower-tier contractor. Ultimately, this can lead to lower-tier contractors finding themselves bound to terms they had no part in negotiating (and, perhaps, were even unaware of) and present risks and liabilities affecting them very differently than the prime contractor who negotiated the terms. This appears to have been the case in PowerCom, Inc. v. Valley Elec. Co. of Mt. Vernon, Inc., et al., 540 P.3d 1181 (Ct. App. Wash. 2024), in which a subcontractor's ability to seek redress directly from the project owner was severely constrained by a flow-down dispute resolution clause.
A Case in Point: PowerCom, Inc. v. Valley Electric Co. of Mt. Vernon, Inc.
PowerCom, Inc. v. Valley Electric Co. of Mt. Vernon, Inc. involves a dispute that arose from a renovation project at the Seattle-Tacoma International Airport. PowerCom, Inc., a subcontractor, was hired by Valley Electric Co. of Mt. Vernon, Inc. (Valley), which in turn was a subcontractor to the prime contractor (Prime) for the project managed by the Port of Seattle (Owner). The case focuses on PowerCom's claim for additional costs incurred due to COVID-19-related delays.
Prime’s contract contained a multistep dispute resolution process that had to be exhausted before the parties could proceed to litigation. Prime’s contract also required that the dispute resolution process flow down to lower-tier contractors, such that it had to be followed for any pass-through claims that Prime asserted against Owner on behalf of a downstream contractor or supplier. In compliance with the Prime contract’s flow-down provision for pass-through claims, PowerCom’s subcontract required that the Prime contract’s dispute resolution process be exhausted before PowerCom took any other action on such claims. But for non-pass-through claims, PowerCom’s subcontract provided for arbitration and did not require exhaustion.
When PowerCom brought COVID-19-related claims under the Little Miller Act (which typically provides subcontractors on public works a direct right of action against the project bonds for work done or materials provided), the trial court agreed that PowerCom was entitled to proceed with arbitration on its non-pass-through claims against Prime, but because of the flow-down of the dispute resolution process in the Prime contract, the court stayed PowerCom’s pass-through claims pending exhaustion of the Prime contract’s dispute resolution process for similar claims then pending in court between Prime and Owner.
The trial court’s ruling was affirmed on appeal. In its decision, the reviewing court ruled that PowerCom had waived its protections under the Little Miller Act, even though PowerCom’s subcontract did not explicitly mention the Little Miller Act, by virtue of the flow-down provision by which PowerCom agreed to the Prime contract’s dispute resolution process for pass-through claims. One presumes this was not PowerCom’s intention at the time of contracting.
Lessons for Subcontractors
Subcontractors must approach flow-down clauses with a critical eye, understanding that these provisions extend the terms of the main contract down to the subcontract. Flow-down clauses, for all their attempts at consistency, can lead to unexpected pitfalls if not carefully considered. Subcontractors, therefore, ought to negotiate the extent of flow-down clauses carefully. Simply accepting all responsibilities of the prime contract can lead to poor business outcomes for subcontractors. While flow-down clauses aim to (and often do) ensure uniformity and efficiency in project contracting, subcontractors should consider them carefully or risk ending up the victim of unintended outcomes.
